Spreads on PH debt paper rose in Q4 2011

Spreads on Philippine debt paper rose in the fourth quarter of 2011 as the prolonged debt crisis in the eurozone prompted investors to seek higher risk premiums or a higher return on their investment.

Monetary officials said that given the impact of the crisis in Europe on emerging economies like the Philippines, fund owners believed that investing in portfolio assets, such as those from the Philippines, had become riskier, thus the need for a higher premium or interest.

The “emerging market bond index (EMBI) + Philippines,” which is the additional spread sought by investors for choosing to purchase Philippine securities over US Treasuries, increased to 237 basis points in the fourth quarter of 2011 from 159 bps in the same period the previous year, data from the Bangko Sentral ng Pilipinas showed.

The latest EMBI+Philippines was also higher than the 208 basis points registered in the third quarter of 2011.

“Contagion fears increased as markets priced in the possibility of the Euro area’s crisis affecting even generally stable economies,” the Bangko Sentral ng Pilipinas said in a recent report.

The increase in the debt spreads was also fueled by the warning by Standard & Poor’s to several European nations of potential credit-rating downgrades, which eventually materialized in January.

Officials said the increase in the spreads affected not only the Philippines but also other countries that rely on countries in Europe for trade and investments.

The eurozone is one of the biggest export markets of the Philippines and is a significant contributor of foreign direct investments and official development assistance, and is host to many migrant workers.

Fund managers have also raised concerns that investors, such as those from emerging markets, holding euro-denominated bonds are facing default risks.

For these reasons, the crisis in the eurozone is expected to adversely affect the performance even of emerging economies, which are enjoying high growth rates.

The BSP said, however, that the banks in the Philippines have only minimal exposure to the eurozone. Euro-denominated portfolio assets held by Philippine banks account for only 1.4 percent of their total assets, it added.